FAIRX), Bill Miller of the Legg Mason Value Trust ( LMVTX) and Bill Nygren of the Oakmark Select Fund ( OAKLX ). To be sure, not all the big names outdid the S&P 500. Will Danoff of the Fidelity Contrafund ( FCNTX) and Ken Heebner of the CGM Focus Fund ( CGMFX) are among the laggards. Should you sell those two losers? Hardly. Each climbed more than 40% for the year, and they remain near the top of their category for 10-year returns. Much of the gap between winners and losers can be explained by stock-market conditions. When the rebound began, the shakiest small stocks led the way as investors took on more risk and worried less about bankruptcies. Blue chips trailed at a time when it seemed less important to stay with rock-solid investments. As a result, small-value funds ranked near the top, doubling their value for the year, while large-growth funds trailed with a return of 68%. With investors embracing value stocks, the strongest performers included some diehard contrarians, such as the Legg Mason Value Trust, which has doubled during the past year. Manager Bill Miller looks for undervalued stocks with good growth prospects. His portfolio includes turnaround candidates as well as stocks that seem too cheap. After topping the S&P 500 for 15 straight years, Legg Mason fell behind in 2006 and 2007. Performance suffered in 2008 when some of the fund's financial positions collapsed. But early in 2009, Miller decided the big banks had bottomed and he began loading up on stocks such as JPMorgan Chase ( JPM) and Bank of America ( BAC). Those soared as credit markets recovered. Miller also scored with unloved retailers, including Sears ( SHLD) and J.C. Penney ( JCP). Another big winner was Oakmark Select, which returned 99% for the year. Manager Bill Nygren buys stocks that sell for two-thirds or less of their fair values. He only takes companies with strong cash flows and strong growth potential. The formula backfired in 2007, when some cheap financial stocks collapsed as the credit crisis unfolded.
Nygren dumped his worst mistakes and stuck to his longtime investing strategy. That began paying dividends in 2008. As falling oil prices hurt energy stocks late in the year, Nygren bought Newfield Exploration ( NFX), an operator of oil and gas wells. The shares rebounded when oil prices covered in 2009. Another holding that surged in 2009 was eBay ( EBAY), which jumped as investors regained their enthusiasm for online retailers. Big gains from such stocks enabled the fund to maintain its stellar long-term record. During the past decade, Oakmark has returned 7.6% annually, outdoing 98% of its large blend competitors. The top-performing large-blend fund for the past 10 years is the Fairholme Fund, returning 95% in the past year. Holding a concentrated portfolio of about 20 stocks, manager Bruce Berkowitz makes bold bets. When fears about health care reform depressed drug stocks, he put 12% of the portfolio into Pfizer ( PFE). Last year, he loaded up on American Express ( AXP), figuring that the company would thrive despite rising bad debts. The shares soared and he sold the position. Another big winner was Hertz Global ( HTZ), which revived as demand for rental cars began to recover. A winning bet on Ford ( F) helped CGM Focus return 47% during the past year. But the fund trailed the S&P 500 partly because of some trouble with insurance holdings that occurred early in the year. Manager Ken Heebner dumped stocks such as MetLife ( MET) and Prudential Financial ( PRU), booking losses before the shares had a chance to rebound. Shareholders should not be surprised that CGM sometimes trails the benchmark. Heebner runs a concentrated portfolio of fewer than 25 stocks. He trades quickly, taking big stakes in hot sectors. Most often his shifts have been on target, but he sometimes misses the mark. Fidelity Contrafund has played it safe lately, emphasizing defensive stocks, such as consumer products giant Procter & Gamble ( PG). That helped the fund outperform most large growth competitors during 2008. But high-quality names lagged in the rebound, and the fund returned 59% during the past year. Manager Will Danoff buys growth stocks selling at reasonable prices. He has assembled a sterling record by outperforming most of the time in both up and down markets. -- Reported by Stan Luxenberg in New York.